Cancellation income - now excluded from TOMS again!
posted 6th September 2019
Well, that didn't last long...!!
HMRC have today confirmed in Revenue & Customs Brief 9 (2019) that cancellation income does not form part of TOMS turnover. Earlier this year, HMRC had updated their TOMS Notice to direct that cancellation income should form part of TOMS turnover from 1 March 2019 as part of a general policy change to the VAT treatment of cancellation income.
HMRC have confirmed that this now won't apply for TOMS cancellation income, because the time of supply for TOMS services (departure date) will never arrive (excuse the pun!). This applies retroactively, so those who have changed their treatment of cancellation income within TOMS since this date (or before) should now ensure their calculations are revised.
What is the deal with cancellation income?
This was based on last year's Budget announcement that VAT would be due on deposits and pre-payments for "unfulfilled supplies". What this means in practice for the general VAT rules is that, where a supply is cancelled, any monies retailed for that supply will now be subject to VAT at the rate at which the original supply would have been, at the time the deposit is paid. (So, for example, let's say that a hotel is booked and a deposit of £60 is received by the hotel on 1 September. The hotel is later cancelled and the £60 deposit is retained by the hotel. The £60 is no longer outside the scope of VAT as per the 1 March changes. Because the supply of the hotel would be taxed at 20% if it had gone ahead, the hotel is liable for output VAT at 20%.. On a gross amount of £60, this gives output VAT payable of £10 to be accounted in the hotel's VAT return which covered 1 September).
We do not agree with this approach in general, because one of the fundamental principles of VAT is that a supply must be made in order for a consideration to be within the scope of VAT. We are aware of general challenges being made to this principle, but in the meantime today's update applies for TOMS sales only.
The reason that HMRC have confirmed that cancellation income for TOMS supplies will remain outside the scope of VAT is due to the VAT "time of supply" rules.
The general "time of supply" for VAT purposes is the earlier of the date of payment, the date a service is performed, and the date of invoice. For most prepaid services, this means that the time of supply will occur on or before the date a payment is made. For TOMS services, this is not the case for businesses which use Method 1 (standard method), because the time of supply is always the departure date, and this will never occur.
If you are using TOMS Method 2 (accounting for VAT when a customer pays more than 20% of the price of the supply) cancellation charges are within the scope of VAT. it is perhaps worth mentioning though that I have never comes across a business which uses Method 2 and, if you do, you may wish to rethink this in light of this news and general cash flow purposes.
What do I need to do?
If you have included cancellation income in your TOMS turnover as of 1 March 2019 (or, indeed, before or after this point), this should be revised.
If you have had a financial year end between 1 March and now, and have already declared your TOMS annual adjustment, this will need to be revised under the normal error correction procedure. If the "error" (i.e. overpayment) is less than £10k, this could be made as an adjustment on your next VAT return. If the error exceeds £10k, this may need to be adjusted via HMRC's VAT 652 error correction procedure.
If you have not declared an annual adjustment in the period since March 2019, you may wish to wait until the time of your annual adjustment to correct this for the period 1 March to 5 September. You would of course still be entitled to adjust for this in the meantime if you would like, but many may not wish to complicate an already complex VAT calculation!
As always, please contact me at laura@vatnav.com or 07971 642789 if you have any questions or would like to discuss.